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Nominal GDP Targeting for Middle-Income Countries

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  • Jeffrey Frankel

Abstract

It has been proposed that central banks should target Nominal GDP (NGDP),as an alternative to targeting the money supply, exchange rate,or inflation. But the proposal appears in the context of the largest advanced economies. In fact NGDP Targeting may be more appropriate for middle-sized middle-income countries. The reason is that such countries are more often subject to large supply shocks and terms of trade shocks. Such unexpected shocks can force the credibility-damaging abandonment of CPI targets or exchange rate targets that had been previously declared. But they do not require the abandonment of a nominal GDP target, which automatically divides an adverse supply shock equally between impacts on inflation and real GDP. The argument can be illustrated in a model where the ultimate objective is minimizing a quadratic loss function in output and inflation but a credible rule is needed in order to prevent an inflationary bias that arises under discretion. A NGDP rule dominates IT unless the Aggregate Supply curve is especially steep or the weight placed on price stability is especially high. Parameters estimated for the cases of India and Kazakhstan suggest that the Aggregate Supply curve is flat enough to satisfy the necessary condition. The general argument applies regardless whether the monetary authorities at a particular time seek credible disinflation, credible reflation, or simply a credible continuation of the recent path.

Suggested Citation

  • Jeffrey Frankel, 2014. "Nominal GDP Targeting for Middle-Income Countries," Central Bank Review, Research and Monetary Policy Department, Central Bank of the Republic of Turkey, vol. 14(3), pages 1-14.
  • Handle: RePEc:tcb:cebare:v:14:y:2014:i:3:p:1-14
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    References listed on IDEAS

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    1. Kenneth Rogoff, 1985. "The Optimal Degree of Commitment to an Intermediate Monetary Target," The Quarterly Journal of Economics, Oxford University Press, vol. 100(4), pages 1169-1189.
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    3. Pranjul Bhandari & Jeffrey Frankel, 2014. "The Best of Rules and Discretion: A Case for Nominal GDP Targeting in India," CID Working Papers 284, Center for International Development at Harvard University.
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    6. Jeffrey Frankel & Ben Smit & Federico Sturzenegger, 2008. "Fiscal and monetary policy in a commodity‐based economy1," The Economics of Transition, The European Bank for Reconstruction and Development, vol. 16(4), pages 679-713, October.
    7. Svensson, Lars E. O., 2000. "Open-economy inflation targeting," Journal of International Economics, Elsevier, vol. 50(1), pages 155-183, February.
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    12. Warwick J. McKibbin & Kanhaiya Singh, 2000. "Issues in the Choice of a Monetary Regime for India," ASARC Working Papers 2000-01, The Australian National University, Australia South Asia Research Centre.
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    Cited by:

    1. Frankel, Jeffrey, 2017. "How to Cope with Volatile Commodity Export Prices: Four Proposals," Working Paper Series rwp17-033, Harvard University, John F. Kennedy School of Government.
    2. Lukas Vogel & Stefan Hohberger & Bernhard Herz, 2015. "Should Commodity Exporters Peg to the Export Price?," Review of Development Economics, Wiley Blackwell, vol. 19(3), pages 486-501, August.
    3. Irina Kozlovtceva & Alexey Ponomarenko & Andrey Sinyakov & Stas Tatarintsev, 2019. "Financial Stability Implications of Policy Mix in a Small Open Commodity-Exporting Economy," Bank of Russia Working Paper Series wps42, Bank of Russia.
    4. Jonathan Benchimol & André Fourçans, 2016. "Nominal income versus Taylor-type rules in practice," Working Papers hal-01357870, HAL.
    5. Benchimol, Jonathan & Fourçans, André, 2017. "Monetary Rule, Central Bank Loss and Household’s Welfare: an Empirical Investigation," Globalization Institute Working Papers 329, Federal Reserve Bank of Dallas.

    More about this item

    Keywords

    Central bank; Developing; Emerging markets; GDP; Income; Inflation; Monetary policy; Nominal; Shock; Supply; Target; Terms of trade;

    JEL classification:

    • F41 - International Economics - - Macroeconomic Aspects of International Trade and Finance - - - Open Economy Macroeconomics
    • E52 - Macroeconomics and Monetary Economics - - Monetary Policy, Central Banking, and the Supply of Money and Credit - - - Monetary Policy

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